Turkey Ends FX-Protected Deposit Program, Marks Policy Shift

Turkey, under Finance Minister Mehmet Simsek, concludes its two-year FX-protected deposit program, signaling a return to economic orthodoxy. The move, part of recent policy shifts, aims for sustained improvements in inflation, foreign reserves, and the current account.

Turkey, on Jan. 1, officially terminated its two-year-long foreign exchange (FX)-protected deposit program, known as KKM. Finance Minister Mehmet Simsek, appointed after President Erdoğan’s re-election, stated that this marks a pivotal moment in Turkey’s economic trajectory. The program’s objective, initiated before the policy shifts, was to bolster the lira and curb dollarization by ensuring returns compensated for exchange rate-related losses on savings in local currency. Simsek’s announcement follows the central bank’s significant interest rate hike, highlighting a broader policy U-turn.

President Erdoğan’s pre-2023 stance resisted lira devaluation and interest rate hikes. However, post-re-election, Simsek and the central bank underscored a commitment to economic orthodoxy. Simsek’s recent statement outlines a vision for 2024, anticipating a decline in annual inflation, increased reserve adequacy, the end of the FX-protected system, a lasting improvement in the current account, and the establishment of fiscal discipline. This move away from incentivized programs like KKM signifies a strategic shift in Turkey’s economic policies.

On Dec. 31, Simsek conveyed the upcoming changes, emphasizing a departure from the need for incentives in the exit process. As of Jan. 1, banks ceased offering FX-protected lira deposit accounts for savings, aligning with the government’s broader vision for economic stability.

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